THE HEDGEYE EDGE
Consensus is not bullish enough on Quiksilver (ZQK). The consensus view is understandably focused upon the new management team, cost cutting, and improved efficiency. We think that gets the stock to where it is today. Ultimately, in order to really get this stock to work, we need to see significant top line growth.
The only way we think we can gauge the viability of top line growth coming to fruition (for the first time in 5-years) is to roll up our sleeves, ask actual “action sports” and “surf consumers” (over 1,000 of them) an array of very detailed questions to understand the relevance of the brands, and subsequently determine whether the brands are powerful and relevant enough for the new management team to use effectively as an offensive weapon to create value.
So that’s what we did.
Our key takeaway here is that the brands – Quiksilver, Roxy and DC – all scored far better than we even hoped. We believe these brands all possess the relevance needed to grow from here. Statistics regarding brand authenticity, desirability, and customer loyalty (versus 20 other brands) came through as much more positive than we’d have thought, and certainly more than the consensus currently believes.
INTERMEDIATE TERM (TREND) (the next 3 months or more)
This is the only part of the story we’re not thrilled with. Why? 2014 will be all about cost cuts and modest (2%ish) top line growth. As such, our estimates for 2014 are not too far off of consensus. This is all a logical progression. The management team started in early 2013. The first and easiest thing to do is reorganize the company, cut redundant functions and ensure that the team is filled with ‘A’ players. Earnings in 2014 should be slightly positive vs. a loss of ($1.53) last year. That’s all due to restructuring. The good news is that this is largely baked, suggesting to us that there’s likely little risk of failure. That gives us confidence in minimal downside in the stock in 2014.
LONG-TERM (TAIL) (the next 3 years or less)
2015 and beyond is a much different story. Our long-term model has ZQK adding $600mm in revenue on top of a $1.9bn base. As a frame of reference, our top line growth forecast is over 1,000 basis points ahead of consensus.
Ultimately, we’re at over $1.00 per share in 2017, which is 45% ahead of the consensus. In the end, this is a 40%+ EPS grower that’s a double if we use a 20x p/e, which we think is more than fair based on the soon-to-be-realized growth profile.
Bottom line: Put this stock in your portfolio and forget about it. You’ll be pleasantly surprised a year or two from now.